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May 18, 2012

Don’t Risk It: Hybrid Policies Can Reduce the Risks in Long-Term Care

Dramatic increases in the cost of long-term care (LTC) insurance have your clients struggling to balance the expense of coverage against the risk of not insuring against the potentially enormous cost of long-term care. Protection against the costs of long-term care is so critical that you cannot advise against it. So, what do you tell a client who is unwilling or unable to purchase LTC insurance? You can help these clients avoid overpaying for long-term care by using a life insurance policy to provide coverage in the event that long-term care is needed, while simultaneously preserving your client’s estate if the need for care does not arise.

The Risk of Overpaying on LTC Insurance

The primary risk to your clients in purchasing LTC insurance is that they will not use it. There is no surrender value, so your clients could pay on a policy for years and lose the entire investment if they are lucky enough to never require long-term health care. Because most insurance companies will approve coverage only for relatively healthy individuals, this risk can be significant.

Further, most policies are capped at a three-year period of coverage because longer policies have become too risky for the insurance companies. If your client does end up using the coverage, he encounters the additional risk of living beyond the three-year coverage term. In that case, an alternative payment method would be required, so your clients might wonder why they should bother with LTC insurance at all.

For a couple in their early 60s, LTC insurance costs roughly $3,500 per year for coverage that pays an average $150 daily benefit for three years. This expense often makes it difficult for many retirees to purchase LTC insurance.

The problem is that you cannot advise your clients against purchasing some type of LTC coverage—the costs of long-term care are rising just as rapidly as the associated insurance costs. A hybrid LTC-life insurance policy might provide the solution that your clients need.

Dual Protective Benefits of Life Insurance

A type of hybrid life insurance policy can be an attractive option for clients who want to plan for long-term care needs while protecting against the risk that they’ll never need coverage. A hybrid life insurance policy is a policy that provides a traditional death benefit to your client’s beneficiaries but also allows some or all of this death benefit to be withdrawn to pay for long-term care expenses.

With these policies, if your client never needs long-term care coverage, his or her beneficiaries will still receive tax-free life insurance proceeds as they would under any traditional life insurance policy. The certainty that premium payments will not result in a worthless investment may provide the incentive your clients need to purchase coverage. In the meantime, the client gains peace of mind knowing that his long-term care needs will be covered if such care becomes necessary.

Of course, if the client taps the insurance policy to pay for long-term care benefits, the death benefit will either be eliminated or reduced, depending on the amount of coverage required. Further, couples are usually required to purchase separate policies.

Additionally, there is the risk that your client will require an extended stay in a nursing home. In this case, where the LTC policy would cover the cost of the stay, the internal value of a life insurance policy would eventually be exhausted, leaving your client with the task of financing the remaining costs. Despite these risks, clients might find that the benefits of these hybrid policies outweigh the risks of a traditional LTC insurance policy.

Conclusion

The need for long-term care can be unpredictable and the costs at risk are extremely high. For your clients who are hesitant to pay for potentially unnecessary LTC insurance, the solution could lie in a hybrid LTC-life insurance policy that provides protection against long-term care expenses while preserving assets for your client’s estate.

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